Stock Exchange Key lessons in stock rationalisation - The learning from Sovereign Housing Association's stock rationalisation approaches since 2006
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Stock Exchange Key lessons in stock rationalisation The learning from Sovereign Housing Association’s stock rationalisation approaches since 2006
Contents
Introduction 1
A brief summary of projects 3
Buy, swap or manage? 6
Some key lessons by theme 11
Conclusions 19
About Sovereign
Sovereign Housing Association is stock numbers in each varying
one of England’s largest housing from single figures to almost
association groups, managing 7,000 homes. In 26 local authority
around 34,000 homes across a areas we hold fewer than
range of tenures in the south and 100 homes.
south west.
In 2011 we rationalised our
We employ over 1,000 staff governance structure, collapsing
and our head office is based in the group and four constituent
Newbury. To support effective housing associations – Sovereign
local service delivery, we also South & West, Sovereign
have operational offices in Twynham, Sovereign Vale and
each of the main regions we Sovereign Kingfisher - into a
work in: Berkshire, Hampshire, single legal entity. This has
Oxfordshire, Dorset, Devon and created a leaner, more efficient
the West of England (including decision making process, with
Wiltshire, Gloucestershire, Bristol economies of scale and other
and Somerset). financial advantages. Our vision
is to be a leading provider of
Our social rented housing stock flexible housing solutions in
covers 59 local authorities, with southern England.01
1. Introduction
It is clear that stock rationalisation Stock rationalisation can be fulfilling our purpose and what we
will be an ongoing feature of the complicated and time consuming, could do better.
housing landscape over coming involving myriad strands of work,
years, as organisations seek to major transfers of critical data, The findings make interesting
improve customer service and differing modes of operation, reading and build into a series
operational efficiency against uncertainties for residents and of common themes and lessons
a macro economic context of staff, and very significant financial that will add further rigour to our
government cutbacks, austerity transactions. The impacts on the approach in the future.
and financial constraint, and organisation of sizeable projects,
radical changes to housing policy. involving hundreds of homes, can It takes two to tango on
be akin to buying and integrating rationalisation and one thing we
In some cases, rationalisation entire new businesses. have learnt is that the more open,
may be part of a response to the committed and prepared both
Value for Money standard in the Clarity of purpose and parties are from the start, the
new Regulatory Framework, which attention to detail are vital for better the outcome is likely to be.
requires housing associations success. At Sovereign, stock
to consider the optimal use of rationalisation is driven by a In that spirit of openness, and
their assets, including rigorous clear strategy. Rationalisations in the interests of helping to
appraisal of all potential options. are complementary to our shape the environment on
development activity, not a rationalisation for the future, we
For Sovereign, stock replacement for it. We recognise are publicly sharing the lessons
rationalisation is about that while rationalisations may not we have gleaned. We hope you
consolidating our geographic add to the overall housing stock find them useful.
‘footprint’ to achieve both high now, resulting cost efficiencies
service standards and greater can free up resources for future
efficiency. Sovereign has been investment in new development.
active in the stock rationalisation Done well, rationalisations can
market since 2004 and our first support growth, effective asset
project, involving nearly 100 management, and financial
homes in Cornwall, completed in efficiency and capacity.
early 2006.
In March 2012, we commissioned
Our activities since then have Ark Housing Consultancy to carry
affected over 2,700 homes and out a review of six of our projects
many more residents through to date. Their brief was to
stock sales, acquisitions, swaps examine the various approaches
and management agreements, we have used, their relative
with proposals affecting over success and benefits, the costs
1,000 more homes currently and risks of each, and the key
under consideration. lessons to be drawn. We wanted
to understand how well we are02
2. A brief summary of
completed projects
Strategic Planning Decision to
Rationalise Stock
Project 1 – and maintenance and future Business Efficiency and to improve services
to residents
investment needs. Further details
Stock disposal via were supplied in response to Resident Consultation
competitive tender tenderers’ questions. Survey and visits to determine preferences
for future service delivery - updates stock
rationalisation proposal
In 2004, we undertook a detailed Residents’ representatives were
Internal Expression of Interest
strategic project to understand involved in testing the experience Contact made with RP’s
the net present value (NPV) of and delivery of services by each active in the location
all our stock and our success as of the tenderers, financial tenders
a landlord from the residents’ were evaluated, and a preferred Issue PQQ
Submission of background on the RP -
perspective. Following the review, bidder identified against a scoring information for residents
we decided to rationalise our matrix which took account of
holdings in Cornwall. In total, 96 residents’ views.
Issue Invitation to Tender
general needs properties were Issue ITT - data pack to shortlisted RPs
involved, comprising 67 flats and After tender acceptance, the
29 houses. The properties were parties jointly agreed the extent
remote from our main operating of further information needed Selection of Preferred Bidder
Financial assessment of bids - Resident Panel
areas, there was no local office to support the transfer. The views on RSLs approach to service delivery
and we were not looking to grow Managing Directors of both
in the area. Costs were similar to organisations were involved in the Due Diligence Process
other areas, but rent restructuring project group, which therefore Contract negotiation, legal searches, data
exchange
meant rental income would had the authority to make quick
decline in real terms. decisions and commit resources.
TSA s172 Consent (formerly s9)
Application to TSA for formal consent to
While the residents were happy We brought forward responsive transfer stock
with us as a landlord, they repairs to ensure all works were
welcomed the chance to have a completed and the stock was Exchange Contracts
Formal exchange of contracts to commit the
more local service presence and in good condition at transfer. parties to the transaction
local contractors. We also consulted For the benefit of our future
the local authorities and took their reputation, we wanted departing Preparation for Transfer
preferences for rationalisation residents to continue to see us as Communication to residents, transfer of rent
accounts and direct debits, IT data transfers,
partners into account. a good landlord and for customer TUPE staff transfer consultation
satisfaction levels to be at least
In the summer of 2005, we maintained up to the point of Formal Completion and Transfer of Properties
and Staff
conducted an open tender transfer. Completion of the legal process
process to an agreed shortlist
of tenderers. We provided Formal completion was achieved Post-transfer Processes
information on income from the on 31 March 2006. Settle outstanding rent arrears, transfer of
files, resident communication
properties, plus cost of repairs03
Projects 2,3 and 4 – As well as financial evaluation, the The transaction completed on
selection process involved an open 29 March 2010.
Stock acquisitions via invitation to residents to question
competitive tender tenderers at an informal ‘beauty By 2009, we had used
parade’. The residents voted as our experience of earlier
These three projects were they left the meeting, expressing rationalisation projects to develop
opportunistic acquisitions arising their preference of landlord. a project team approach, with
from invitations to tender. Additional drop-in sessions were standardised documentation
also arranged. Our successful and processes to facilitate
Project 2 - In February 2006 approach included using high acquisitions. We organised events
agents acting for the vendor quality display and information for residents and undertook
housing association invited bids materials, with senior managers testing of customer satisfaction
for 154 general needs homes and operational staff attending to after transfer.
located to the West of the A34 in demonstrate our commitment.
one of our core operating areas.
The sale resulted from the selling Due diligence identified a
association rationalising unwanted significant repair issue to some Strategic Planning Decision to
stock from a recent merger. flats and the remedial costs were Rationalise Stock
Business Efficiency and to improve services
Sovereign’s bid was successful, taken into account in negotiations to residents
but the rapid move on of stock by over the final price. Management
Initial Approach by Vendor to
the vendor did create a number of agreements with external agents Determine Interest
issues subsequently around lack for blocks occupied by vulnerable Does this opportunity fit the Strategic Plan
of available data and information. client groups were also in place,
Completion took place on 30 e.g. a women’s domestic violence PQQ
Preparation and submission of
March 2007. refuge, rough sleeper projects, etc. requested information
This case was also unusual in The vendor association required Invitation to Tender
that a competing association, completion by 31 March 2008, View properties,. Model financial bid and
prepare supporting documentation
Vale Housing Association, joined imposing significant time
the Sovereign Group during constraints on all involved. The
the tender process. Following heavily condensed timescale Tender Assessment
Selection process may involve scrutiny
the acquisition, an immediate on a very sizeable transfer by residents
internal back-to-back transfer led to a number of issues.
was made to Vale HA at the Communications with residents Preferred Bidder Status
same price. All communications around catch-up repairs and Tender accepted subject to due diligence and
legal processes
to residents before and after maintenance could have been
transfer were sent in the name handled better, the transferring
Due Diligence
of Vale HA. After completion, staff team was under-resourced Testing of information and stock condition data
Vale staff visited all residents and we were under-prepared - consequent post-tender negotiation
and carried out a programme for the scale of the integration
of catch-up repairs. A planned process. A failure to fully TSA s172 Consent
Application by vendor RP for formal consent
internal stock rationalisation to appreciate the nature of some to transfer stock
consolidate regional holdings of the management issues
through Sovereign Vale was associated with the stock and Exchange Contracts
delayed to avoid over-stretching tenancies also resulted in an Formal exchange of contracts to commit the
parties to the transaction
local resources. initial drop in resident satisfaction
after transfer.
Project 3 - In late November Preparation for Transfer
Communication to residents, transfer of rent
2007 an opportunity arose to Project 4 - This was part of a accounts and direct debits, IT data transfers,
TUPE staff transfer consultation
acquire 850 properties in Bristol major rationalisation of stock by
and Portishead, comprising 28 a large housing association. The Formal Completion and
bungalows, 284 houses, 488 680 properties involved were Transfer of Properties and Staff
Completion of the legal process
flats, 41 maisonettes and 9 broken down for transfer purposes
commercial properties. We already into zoned packages and put out
Post-transfer Processes
managed around 1,000 properties to tender. Sovereign bid in June Settle outstanding rent arrears, transfer of
in the area and had established 2009 for the zone covering West files, resident communication
an area office. The acquisition Berkshire and the M4 corridor,
represented a good strategic fit which comprised 52 general needs Review
Review process and derive learning, test
and we submitted a tender in flats, five houses and 34 sheltered resident satisfaction.
early 2008. or supported units. Only done on later transfers.04
There are advantages and disadvantages to all
methods of stock rationalisation.
Project 5 – The client association handled Strategic Planning Decision to
Rationalise Stock
all communications with
Management residents, local authorities and
Business Efficiency and to improve services
to residents
Agreement only other stakeholders up to the
Informal Approach
date of handover on the basis Discussions at Director level to determine
interest in a management agreement. Other
This opportunity arose in June of an agreed plan. Following RPs also approached
2009 when the other party the handover, we sent out
invited a number of housing introductory letters and welcome Stock Assessment
Short inspection & appraisal with estimation of
associations to submit proposals packs and held events and face to repair & future planned maintenance costs
to manage 138 newly built homes face meetings with residents.
in South Hampshire - 79 general Calculation of Management Fee
needs flats, 10 houses, and 49 The developers had contracted Negotiated fee to cover repair, planned
maintenance, legal costs & management
shared ownership properties. a number of management
Following acceptance of our bid, companies during scheme
Preferred Partner Status
negotiations took place over a construction to handle aspects Kingfisher HA identified as partner for entering
draft management agreement of the shared ownership a management agreement
supplied by the other association. scheme management. Our
staff had to devote significant Joint Project Team
Joint team managed various workstreams &
A three year agreement was time to attending meetings data exchange
negotiated, covering housing between shared owners and
and estate management, the management companies or
Operation Team Involvements
all responsive repairs and developers to resolve unforeseen Early engagement of operational teams to
ensure smooth handover
maintenance. The client issues, such as replacing dying
housing association completed trees in the landscaped area.
outstanding repairs prior to Communications
Residents & local
handover. Planned maintenance Management of the properties authorities informed
was not included as the stock was was handed over on 1July 2010.
recently constructed and under The date was chosen to avoid Preparation for Transfer of Management
warranty. All rents and service year-end procedures and to fit Transfer of rent accounts & DD’s, data &
file transfers
charges are paid over to the with a quarterly rent cycle.
client association, with quarterly
Formal Handover
invoicing of the management Notification to residents &
fee plus any exceptional shared owners
recharges, e.g. those arising
from management company On-Going Contact with Residents,
Shared Owners & Developers
invoices for grounds maintenance, Relationship building & problem solving
cleaning, etc.05
Project 6 – ownership of the process and the Strategic Planning Decision to
Rationalise Stock
data/ information issues ensured
Stock swap and positive relationships were
Business Efficiency and to improve services
to residents
management maintained throughout.
Informal Approach
agreements Potential for a stock swap arose from informal
discussions at Chief Executive level - similar
Ultimately, we swapped ownership strategic aims
This opportunity developed of 387 Sovereign properties in
following informal discussions at Somerset for 338 properties, Senior Management Involvement
Senior managers asked to investigate
Chief Executive level. The two mostly in Wiltshire. Under the feasibility
associations both recognised the management agreements, 310
potential strategic benefits to our Sovereign properties changed Operational Team Involvement
Identified likely number &
businesses and residents from management and we took 420 location of properties
rationalisation of stock holdings properties in return. The deal
virtually balanced in financial Valuation
outside of core operating areas. Agreed the assumptions for the valuation
This was a negotiated process, terms. The management model & jointly instructed stock surveys &
valuation number crunching
but one that became extremely agreements covered housing
complex due to lenders’ charges management, responsive repairs Negotiation
and planned maintenance. The Extensive & complex. Valuations influenced
and the differing nature of the decision for a mix of swaps & management
tenures and ages of the stock on agreements were signed and the agreements
either side. deal completed on 30 January
Resident Consultation
2012. Joint meetings with Resident Board & residents
Close joint working was a crucial
plus. We agreed the assumptions We subsequently undertook a Business Case Approved
Board approval granted to proceed
to underpin valuation with the review to consider the learning
other association at an early points from the process for future Joint Project Team Meetings
stage and external consultants projects. Joint meetings held to identify & co-ordinate
task achievement
used these to model the property
portfolio values and undertake Preparation for Swaps & Management Transfers
Communication to residents, TUPE staff
stock condition surveys. Joint consultation, etc.
project teams met regularly
to co-ordinate the process Due Diligence
Heads of Terms, stock condition survey testing,
and specialist sub-teams were data exchange, risk assessment
established. For example, a
file transfer protocol site was Exchange of Contracts
Formal exchange of contracts to commit the
set up by the project IT team parties to the swap transaction
for sharing of documents and
information, which worked very Formal Completion & Transfer of Properties & Staff
Legal completion to swap stock & signing of
well. We maintained extensive Management Agreements
communication with residents
Post-transfer Processes
throughout the process, based on Settle outstanding rent arrears, transfer of files,
a jointly agreed communication resident communication
plan. Staff being transferred were
Review
also extensively consulted. Joint Review process & derive learning06
3. Buy, swap or manage?
So which approach operational and human resource
considerations are necessary
would we recommend precursors to success.
from our experiences?
A strategic approach
The simplistic answer is that a There is no doubt, however, that
straight acquisition or disposal stock rationalisation projects are
by negotiation tends to be easier more likely to succeed if they fit
and consequently favoured within the parameters of a well
by managers tasked with developed strategy.
successfully concluding projects.
But the reality is more complex Being clear about asset
and involves a range of strategic management goals – how you
and operational considerations. want to grow, where you want to
grow, the type of stock and tenure
There are advantages and preferred in each location, and,
disadvantages to all methods of conversely, stock you are prepared
stock rationalisation and each to sell or swap – will generally lead
individual project will also have its to better rationalisation results
own good and bad points. What our than an opportunistic approach.
experience has taught us, though,
is the critical importance of a Strategic clarity should ensure:
number of key issues in determining
• Opportunities which do not fit
project success or failure.
the strategy are less likely to
be pursued
Stock rationalisation cannot
be treated as an ‘add-on’ for • There is better understanding
development departments or of the strategic value of
asset managers. Rationalisations potential stock, including
involve the transfer of a business, whether a premium is justifiable
with the need to maintain and whether taking a level of Larger projects
poorer stock within a package is
‘business as usual’ to the point
acceptable
particularly come with
of transfer for the disposing
landlord and from inception for the • Staff motivation and
a significant level of
acquiring one. The implications, commitment is solid and project inherent risk attached.
particularly of larger projects, resourcing is appropriate
are felt organisation-wide and for
months, and sometimes years, Sovereign has now developed
to come. A strong understanding a strong strategic approach to
of the overall commercial, stock rationalisation, and this07
Stock rationalisation projects are more likely to
succeed if they fit within the parameters of a
well developed strategy.
is helping us to operate more a particular issue, or from trying and the subsequent pain for
pro-actively in the market and to manage a rationalisation managers is only lessened if the
less reactively. We have backed process too quickly. Due diligence savings are pushed down into the
that strategy by appointing a should always be rigorous and relevant team budgets.
senior manager to consider and comprehensive.
manage all stock rationalisation Even so, it is in the nature of
opportunities and by investing Examples of information and data the beast that, occasionally,
in software that will improve our problems with potentially adverse something will not be uncovered,
market intelligence. consequences which we have certain data cannot be fully
uncovered at due diligence or only verified or that information
Managing key risks post-completion include: may be missing. Risk cannot be
Because stock rationalisations • local caretaking and grounds entirely eliminated, but it can be
involve transferring all of the maintenance contracts substantially mitigated.
related business functions, larger not declared by the selling
projects particularly come with a association. We put considerable time and
significant level of inherent risk effort into validation of the
• poorly managed leasehold
attached. Understanding and stock, including visiting all stock,
schemes, including one that
managing those risks effectively whether or not the vendor’s
led to a Leasehold Valuation
is imperative. data is supported by a warranty.
Tribunal post-transfer and
The third party surveyors will
considerable charges for repairs
With every rationalisation project, generally only have visited
and maintenance obligations
we recognise that our reputation (and warranted) a small sample
unfulfilled by the selling
as a landlord and within the of the stock. Understanding
association.
sector is basically on the line. The the complexities of the stock,
• discovering stock shown including tenure variations and all
damage from a failed or poorly
as general needs was in of the associated issues, will help
handled project can be deep and
fact supported housing for support strong due diligence and
long-lasting.
people with learning difficulties, effective management planning.
creating additional The nature of the stock is the
Due diligence
management complexity. single biggest determinant of
Our experience is that the true
• discovering restrictive ‘value’. We also give the other
value and benefits of a proposition
covenants preventing sale of party a checklist of all information
are impossible to determine in
some properties. and data we will require for
detail until effective due diligence
analysis before completing a
has taken place. • discovering additional
transaction.
management companies
It is hard to overstate the involved in managing shared
importance of the due ownership leasehold blocks.
diligence process. In all stock Desperation on the
rationalisations, the devil is in the Mistakes are always more likely to other side to complete
detail. Such mistakes as we have
made on stock rationalisations
happen if the process is rushed. a deal very quickly
Desperation on the other side
– and thankfully they have been to complete a deal very quickly should act as a
few – have generally resulted from should act as a warning sign. warning sign
an inability to obtain adequate
information over some aspect Negotiated cost savings tend to
of the business, not foreseeing alleviate rather than cure issues,08
Communication resource support we will need at
Beyond the mechanics and detail any stage of a given project.
of the due diligence, poor or Each of these stages needs
ineffective communications is a to be properly resourced; the
prime risk. Stock rationalisation organisational impacts will be
is ‘business speak’ for a process felt more by different teams
that impacts heavily on the day at different times. High quality
to day lives of often hundreds of support from back office
individual residents and staff. It functions is also essential to
creates uncertainty and disruption enable the frontline teams to do
and we should not be surprised their jobs effectively both pre- and
that it therefore also evokes post-transfers.
strong emotional responses.
A senior level project sponsor
Detailed communications planning is important to help drive the
covering the entire rationalisation entire process, ensure effective
resourcing is in place, and provide
process is vital to winning and
the authority to get things done The strategic and
maintaining the support of
affected residents and staff. This to planned timescales. While financial benefits of
includes staff from all parts of external consultants can help with stock rationalisation
a range of issues, projects need to
the organisation, not just those
be driven by a well-directed, high need to be strong
transferring in or out.
capability internal project team. enough to justify the
Project management investment.
Successful transfers take
It is very easy to under- months of intensive effort and
estimate the scale of internal resourcing, irrespective of the
resourcing required to manage size of a project. Without very
a rationalisation project of careful planning, it is easy for
any size effectively. We have a large rationalisation to knock
developed a clear process for organisations off balance and
managing projects, which helps adversely affect performance.
us to analyse and plan the kind of
RNING
LEA 8
ST
8 RA
TE
N
GY
TIO
4. Review 1. The Bid
• What could we • Does it fit our
NESS INTEGRA
do better? strategy?
• Update procedures • What is the value to us?
8
• What is our USP?
STOCK
LEADE
RATIONAL-
ISATION
3. Mobilisation 2. The Business Transfer
R
I
• Business integration • Project Team
S
S
BU
H
• Rent arrears • Detailed due diligence
IP
• Catch-up work • Data management
• Communication • Consultation
• Contents
8
8
PR T
OJE N
C T M A N AG E ME09
Financial evaluation Take the following notional example:
Given the resource and wider
organisation implications and the
potential levels of risk attached, Newbuild £ per home Transfer £ per home
the strategic and financial
benefits of stock rationalisation Cost 135,000 EUV-SH 45,000 *
need to be strong enough to less grant (45,000)
justify the investment. In the
current environment of spending Funding 90,000 Funding 45,000
constraint and increased
efficiency, stock rationalisation * Any Social Housing Grant will also be transferred to the new landlord
has to compete for investment
and resources alongside new
development and other service
options.
Obviously, stock valuation is This assumes newbuild homes acquisition despite the book cost
central to any financial evaluation. built fairly recently under the old being significantly greater than
Yet valuing stock for transfer is as grant regime and a broadly typical EUV-SH.
much art as science. The Existing EUV for a scheme in a reasonable
Use Value as Social Housing (EUV- condition and area. But while the financial evaluation
SH) is driven by stock condition is not entirely simple, taking
and rental income. But it also It shows that for the cost of a new a strategic view will always
needs to take account of all build property, two existing homes help decision making. We see
future liabilities, and sometimes might be acquired. If we then stock rationalisations and new
these will not be fully apparent assume that some level of subsidy development as complementary
until due diligence has been is added to the EUV for strategic activities, both contributing to our
undertaken and, occasionally, not fit or other benefits, say a 33% growth and asset management
even then. premium, then it is still possible to strategy, to building our balance
acquire three existing homes for sheet, and to our overall purpose
In addition, strategic every two new homes which could as a housing association.
considerations and other potential be built. This equation should take
‘value added’ aspects of the account of the future investment
deal – for example, geographical needs of the transferring stock.
consolidation, improving the stock
base and organisational influence In reality, of course, things are
within particular localities, rarely as neat as this would
or improving contract and suggest. Affordable Rents, ‘Value added’ aspects
management efficiencies - can welfare reform, the book values of the deal … can make
make the payment of a premium of any new stock included in the payment of a
above EUV-SH appropriate. Any stock packages and many other
subsidy or premium level may need factors change the equation. With premium above
to be judged against organisational less grant now available and at EUV-SH appropriate
subsidies for new build and the lower rates, a recently completed
likely future costs in use. project could still be a sensible10
Transaction and including on unsuccessful and principles can be met and there
resource costs abortive projects. is agreement on stock valuation,
swaps can kill two rationalisation
The related project and transaction birds with one stone and bring
Advantages and
costs should be seen in the genuine strategic benefits.
same light. It is too simplistic to disadvantages
suggest the costs of one type of While we cannot be categoric Management agreements will
rationalisation project will be lower about whether buying, swapping always carry some degree of
or higher. A great deal depends or managing homes represents financial risk, in that mistakes
on the complexity of individual the most cost-effective type of in determining the level of
projects and the breadth and rigour stock rationalisation, we can say management fee may lead to
of the budgeting. For example: something about the potential revenue deficits which cannot be
• the transaction and resourcing benefits of each. recovered during the contract.
costs of smaller rationalisations Excellent communications are
can be disproportionately As indicated above, most also needed to ensure residents
high, depending on the level of managers prefer a straight understand the arrangements.
complication. acquisition or disposal to a swap
or management agreement, Further burdens can arise from the
• additional costs within
because a straight sale or need to manage a different set of
management agreements,
purchase should be considerably systems and processes, together
beyond fee levels, can get
simpler. As we have seen, an with the additional performance
hidden in day to day revenue
acquisition will also deliver more monitoring and reporting
expenditure, rather than
homes than new build for the same requirements. The managing
separated out.
investment, plus the transaction housing association cannot
• post-transfer costs, such as costs can be capitalised. simply apply its own standards
extra in-year costs of absorbing
and procedures. Moreover,
and training transferred staff, But acquisitions tend to be more each management agreement
can be forgotten or dismissed. opportunistic too. Depending on is different and if multiple
• other internal or external costs the nature of the opportunity, agreements are in place the
can be easily missed; for this can make for some difficult level of management complexity
example, a lender’s fees for judgement calls, balancing can be significant. Maintaining
charging or removing properties the desire for relatively swift operational performance and
from charge. and cheap growth in stock quality can be difficult.
and income with broader
• management agreement
strategic considerations. In use However, management
projects may not have a
maintenance costs for acquired agreements often come about
dedicated budget, with costs
stock will also generally be higher when one party is ultimately
picked up through day to day
than for newly built homes and looking to sell the stock and the
revenue financing.
this needs to be factored in. other ultimately looking to buy.
• costs tend to be capitalised on
For example, book values on new
successful acquisitions. Committing to a stock swap stock may not make it sensible
will generally involve some real to sell the properties in the short
At Sovereign, we have now depth of thought around the term, but the equation will change
established a ‘benchmark’ average strategic fit beforehand. Swaps over time. If the strategic fit is
transaction and resourcing cost for often entail a high degree of strong, then the shorter term
our stock rationalisation projects. negotiation and strong project hassles may be more than offset
It is not perfect, but it does management, preferably using an by the benefits of being in ‘pole
provide a baseline for us to judge experienced team. The resident position’ with intimate knowledge
expenditure on future projects. and staff communication issues of the stock when it eventually
are effectively doubled compared comes up for sale.
It is important to accept that to other types of rationalisation.
there is a cost to playing in the However, if the will is there on
stock rationalisation market, both sides, a set of agreed core
A great deal depends on the complexity of
individual projects and the breadth and rigour
of the budgeting.11
4. Some key lessons by theme
1. Commitment • Experience within the team of Make time to review
previous projects often saves completed projects
is essential time and money.
• Monitor satisfaction levels and
• It’s very difficult to bolt-on views of transferred residents
An underpinning strategic rationalisation projects to and staff.
direction makes choosing people’s day jobs. Free them up
and committing to suitable • Attempt to cost any work that
as far as possible.
was not foreseen.
rationalisation projects much • Projects don’t end on the day
easier • Build the learning into future
of completion. Post-transfer
projects.
• If rationalisation and growth is issues will almost certainly
seen as part of the core activity continue for 3-4 months, and • Take time to learn from failed
of the organisation and there large scale integrations can bids or negotiations too.
is a clear asset management take a year or more to bed
strategy, the prospects of down. Ensure there is project
senior level commitment team support for operational
and appropriate resourcing staff to smooth transitions of
and authority to deliver desired people and processes.
outcomes is greatly improved.
• Sovereign has now created The project team must have
a senior post to manage the authority to deliver the
rationalisation opportunities required outcome
within a strategic framework. • Team members should
• The lead manager must have clear responsibilities
understand the ‘business’ in the and timescales for their parts
round – this is not a of the project and the
development activity. authority to require others
in the organisation to support
Projects must be properly delivery on time.
resourced from start to • Try to avoid significant
finish organisational change during
a rationalisation project
• The project team should
restructuring can’ disrupt
include all key disciplines
processes, move key staff and
from the start, including
lose continuity and momentum.
finance and rent accounting,
housing management, property
services, IT, HR, communications,
and the frontline customer
enquiries team.12
2. Understand your 3. Closely manage the Meet the key players from
market process the other party early
• An early meeting helps to build
Understand the marketplace Make sure your full project personal relationships and trust.
you are going into team is in place on day one • Agree how you intend to share
information.
• Including key issues like grant • Ensure all relevant disciplines
rates, funding positions, etc. are represented, including • Set up your joint project
frontline staff who will have to meetings schedule.
• Talk to key consultants and get
proper market intelligence. handle operational issues as • Establish the links and contacts
soon as the transfer is between counterparts.
complete.
Understand the drivers and
motives of the other party • A dedicated internal project Standardise the process
‘champion’ is important wherever practicable
• Do they want a better local even where consultant
service for their residents or • For example, Sovereign now has
project managers are used
simply a windfall receipt? a checklist of data required for
to ensure decisions and
effective due diligence.
• Are they acting openly, information requests are
transparently and honestly, or ‘officially’ authorised and • Using a tried and tested
seemingly concerned only with acted upon. framework and standard
maximising the final price? processes can help to minimise
risks and ensure all key issues
Get your key plans in
Understand the stock are taken into account before
place early transfer.
and social profile you are • Including the overall project
receiving • Experienced consultancy
plan, resources plan and
support can help to ensure
• Serious problems can arise if communications plan.
developed processes are
your housing managers are • Scope all main tasks, prioritise applied thoroughly.
not properly prepared for a them and assess risks.
stock or resident profile that is
• Put the project meetings Take account of the
quite different to your norm.
schedule in place. operational cycle
• The asset register may not
• Agree your monitoring and • You can avoid unnecessary
tell the full story. Different
progress review procedures. difficulties by arranging
organisations categorise stock
in different ways. • Agree a methodical system to transfers for an appropriate
version control key documents. point in the normal business
• Understand the nature of any cycle, eg. year-end, with all
third party agreements. • Establish a process to allow for
its changes, rent increases and
resident involvement in
• The ultimate costs of failing to additional processes is not a
decisions affecting them.
research these issues can good time for transfers.
be the difference between • Choose a date that fits with
a successful and unsuccessful your cycle of rent debits and
project. benefit payments.13
Plan the post-transfer period • It’s difficult to recover Face to face communication
• The better your momentum if you get your is time consuming but often
messages or timing badly
communications and process more powerful
planning, the smoother the wrong. It can take a long time
to get your reputation back on • Open forums and informal
post-transfer is likely to be. events for residents can be
track with residents and staff.
• Ensure project managers a valuable way of flushing
are available to deal with the out potentially important
Plan in detail
inevitable post-transfer issues issues before transfer.
that will arise. • Ensure offer documentation
• Involving housing staff who will
and presentations give
• Prepare your frontline staff and later manage properties can be
a realistic picture. Raising
provide any necessary training a helpful kickstart to
expectations too high carries
to cope with new processes or relationships and trust-building
risks, if delivery cannot sustain
anticipated issues. • Allowing transferring residents
the promises.
• Build in the time for key staff to meet their peers from the
• Co-ordinate the
to meet residents and TUPE-d other party is often very well
communications plan content
staff early to start creating received.
and timing with the other
trust and establishing
party, including agreeing any
relationships. Produce proper
issues requiring confidentiality, Think post-transfer
welcome packs and induction
and ensure it is owned and • The immediate post-transfer
processes for transferring
monitored at a high level in period is generally a key time
residents and staff.
both organisations. for increased enquiries and
• Agree your key messages for issues.
4. Good communications residents, staff and stakeholders • Resource your call centre or
are vital early on. Anticipate concerns, enquiries team adequately to
but recognise the need to deal with increased volumes.
Poor communication will adapt plans as projects develop.
• Agree your messages on all
cost time, resources and • Walk through the entire project anticipated issues, like rent
potentially your reputation process in detail and decide arrears management, and
what to communicate when ensure they are known by all
• First impressions are hugely
and how. relevant staff.
important – make them
favourable. • Don’t forget your own staff and • Remember to thank involved
their needs. staff and celebrate successful
• Expectations need to be
managed. Only promise what • Don’t forget the differing needs outcomes.
you can deliver. of leaseholders.
• Tone should be ‘professional, • Build on and adapt previously
but human’ throughout. successful communications
and plans.14
5. Prepare for a wide as an opportunity to mitigate for example.
risk. • For sinking and renewal funds,
range of financial issues • Agree an overage clause on any agree that funds transferred
properties subsequently sold at match with the last actual
Financial impacts and issues can
higher than the transfer statement, plus any funds
range from the highly strategic
valuation, unless there is collected and expended since.
– having adequate financial
agreement to recycle later • For utility supplies, ensure
capacity in place – to the deeply
capital receipts into reprovision reconciliation of meter
operational, like ensuring utility
of services. numbers, locations and
supply information and contracts
do not result in financial loss. suppliers for all gas, water
Consider the full range of and electricity supplies, plus
rent issues early on any unadopted street lighting.
Use a consistent • Rent arrears should be dealt Include information on any
methodology when valuing with using an agreed formula. preferential contract rates.
stock for transfer The formula (eg. the CIPFA
• We use a well-developed net formula) should allow for the Procurement frameworks
present value (NPV) model and receiving housing association to can reduce professional fees
required rate of return. pay a banded percentage of the • Include provision and
arrears outstanding, based on service cost levels for stock
• Any level of subsidy or premium
the overall level of arrears. rationalisation in any relevant
offered in a bid should relate
clearly to added strategic value • Consider any adaptation of frameworks you procure,
in the deal and is a judgement systems needed to deal with eg. legal services, stock
call in each case. any differences in rent year on surveying, etc.
Management Agreements, • Consider accessing frameworks
• Compare assumptions on
eg. some housing associations procured by others, eg. for
forward maintenance from
work on a 48 week year, others stock rationalisation
vendors with assumptions your
a 52 week year. consultants, legal services, etc.
organisation uses on its own
stock and from your own • Identify any issues related to
viewing of the stock, and model rent increases and convergence Ensure all charges on the
likely costs and any catch-up to target rents. properties are discharged in
repairs into your valuation. • Ensure completion does not good time
• Be aware of how shared impact on the timing of rent
• Slow discharge of properties
ownership homes may impact increase notices, to avoid legal
can delay completion of
on valuation, particularly where complications around
transfers.
100% staircasing is allowed. imposition of increases.
• Title searches during due
Lenders often have strong • Try to ensure benefits data sent
diligence should highlight
views on this. to local authorities is accurate
any issues.
• Consider how nomination and complete, including
full names, addresses and • Make sure that properties taken
rights may affect stock use and
numeric identifiers. Poor off charge, stay off charge.
therefore value. Stock with
lower nomination rights is more benefit administration and
flexible and potentially wrong payments can take a lot
valuable. of work to resolve and
impinge on other areas of rent
• Where recently developed stock
administration.
is involved, the net book value
will be greater than EUV-SH, • A new variable is the potential
due to higher capital cost and impact of Affordable Rents on
lower grant. In these instances, value and relet policy.
consider ‘value’ at book (net
cost of development) rather Standardise provision of
than Existing Use as Social information where possible
Housing.
• A pre-agreed spreadsheet
• Where tender information and format on required service
data is inadequate, post-tender charge information, including
negotiations on price following supporting financial
due diligence should be information, is helpful to
expressly allowed for and seen understand charging practice,15
Allow for VAT on • Ensure wide ranging support Consider the impacts on
Management Agreements is available to those transferring and support needs of
out of your organisation as well
• The client housing association non-transferring staff
as those transferring in.
will be liable for VAT on the • Loss of part of a team’s
management and repair costs portfolio or, conversely, a
charged by the managing Give proper attention to
sudden jump in homes managed
housing association. inducting transferring staff within teams, will have clear
to your organisation impacts and require careful
Budget carefully for the • ‘On the job’ training from others management. Management
costs of each rationalisation in similar roles is unlikely to be structures may need to be
process enough. adapted.
• Take a broad approach to • Train incoming staff in office
assessing costs, beyond processes, IT systems, service
external professional fees. standards, and the cultural
values of the organisation.
• There is a need to accept from
the start that costs are at risk • One to ones and group
until completion. While meetings with incoming
successful bids can capitalise staff are helpful. Give them the
costs within the acquisition, opportunity to visit your offices
unsuccessful bid costs will and meet their new colleagues.
need to be written off. • Loss of staff during the process
can lead to a fall in
management or maintenance
6. Properly planned staff standards and increased issues
support will save time post-transfer.
and money later • The same job titles between
organisations do not always
mean the same role.
HR teams from both parties
should joint manage the
Take care to fully understand
transfer of staff closely
the roles and duties of all
• Establish an HR sub-team of the transferring staff
joint project team.
• Even within an organisation,
• Agree a joint communication staff with the same title may
plan and process early on, not all perform the same
including consultations with role, eg. caretakers on different
staff and any recognised trade estates.
unions.
• Some roles may be new to your
• Confirm the terms and organisation and require time
conditions of incoming and and resource to understand and
outgoing staff as early as make consistent with your own
possible to allay fears and offer standards.
clarity.16
7. Avoid disputes over Clarity over the cost base
repairs and maintenance is crucial on management
agreements
Effective planning on • Responsive repairs are
repairs is vital for building normally recharged at cost
or the management fee will
or maintaining trust and
take account of the average
reputation annual repair cost per unit.
• Repairs and maintenance is • Where planned maintenance
often the most contentious works are included within the
issue for residents. agreement, be clear in advance
• Maintaining a full repairs which association’s forward
and management service up maintenance unit costings will
to completion should be made be used.
a condition of the transfer. • Where the client association’s
• Where a backlog of repairs costings or stock condition
items is agreed within the modelling is to be used,
valuation of the stock, the the managing association
acquiring association should should validate the figures
aim to institute a programme for themselves to ensure
of catch-up repairs as soon as sustainability and avoid
possible after transfer, and potential additional costs.
the position should be made
clear to residents.17
8. Quality of data and Commit resources and Put time and effort into
information is key to authority to drive the data validating the stock included
gathering in the transfer
understanding future
• Finding records and data, • Always conduct your own
costs particularly on older stock, can stock survey, including an
be a challenge. It can take time, internal sample.
Poor data and information resource and authority to • Explore more unusual types
present serious cost and deliver to sufficient quality. of stock within the portfolio
management risks carefully.
• Lack of commitment to
Where possible, undertake • Again, stock validation can
good data and information a sample audit of records, uncover important
provision can lead to delays, such as tenancy files and management issues.
aborted projects and damaged rent accounts • It is not unusual for associations
relationships. Hangover issues • This helps test the accuracy of to want to package poorer
can have management and supplied data. stock with better stock. Be
financial impacts over several clear about what you are
years. • It can identify matters for
negotiation prior to contract. getting and price accordingly.
Know the data you need and • It also provides a valuable way
how you will use it to assess how data and records
can be merged after transfer.
• Create a checklist of data and
information requirements • It can help prioritise tasks
needed to facilitate a post-transfer.
transaction. Give it to the
other party at an early stage in Meetings and visits to
discussions.
residents can be valuable
• If the other party is unwilling
tools
to provide certain information
or seems not to appreciate the • They can help highlight issues
potential risks, negotiate that may inform the bid price,
around sharing of risk and such as allowing for CCTV,
financial consequences and upgrading entrance doors, etc.
feed the results through to the to deal with anti-social
final price and contract. behaviour
• They can help prioritise and
direct housing management
resources post-transfer.
• They may uncover unexpected
local contractual arrangements
which need to be accounted for
and managed.18
9. Get the IT right 10. Contractual
concerns
Establish a joint IT sub-team
to manage the relevant Terminating service
issues contracts reduces risks and
• On projects of any size, the simplifies management
IT teams will need to agree
• Termination allows the receiving
an interface and file transfer
association the opportunity
mechanism between their
to apply its own standards,
respective systems for rent
rather than running differing
account and tenancy data.
contract terms, specifications
• On one Sovereign project, a and standards across its stock
file transfer protocol site was holdings.
set up by the IT teams to share
• Consider any TUPE implications
documents and information.
regarding contractors’
This worked well and enabled
employees, and allow for these
good document management
in the transfer or management
control.
agreement.
• Involve housing and finance
• It may well make sense to
staff as necessary so they
maintain a contract associated
understand any data transfer
with a specialist installation on
issues and are prepared in
the stock.
advance.
• Ensure a plan is in place to
• All staff teams involved should
maintain continuity and quality
be able to easily access all
of service delivery as contracts
relevant data.
are terminated.
• Bring in system suppliers
to provide training on data Use legal teams with stock
transfer issues and interfaces,
rationalisation experience
as necessary.
wherever possible
Test data integrity and • If both sides have experienced
legal teams, this should avert
processes before running live
delays and unnecessary issues.
• Cleanse the data and test
• Good experienced project
systems properly.
management, whether internal
• Where large numbers of or outsourced, can support and
properties are involved, facilitate effective legal input.
an extended period between
exchange and completion can
Understand all the approvals
be useful to deal with final data
cleansing, testing and transfer needed
issues. • Consent to dispose from the
HCA (if disposing)
• Freeholder consents for
Encrypt all personal data leasehold property
and only send relevant
• Lender consents for funding
information and charging/discharging
• It is unusual, but not unknown
• Agreements from other
for an entire unencrypted
contractual partners,
tenancy database to be
eg. service contractors.
supplied!19
5. Conclusions
Like most housing associations • The need for effective Housing associations have
involved in stock rationalisation resourcing and high level become more efficient in recent
projects, our learning curve sponsorship of projects, both years and are getting better at
has been steep. But our level internal and external, by both managing assets effectively. But
of experience and expertise is organisations. these twin pressures are only
now significant, and we have the • The need for thorough due likely to increase over the coming
processes in place to manage diligence and for trust and good difficult years. The nature of
opportunities of virtually any relationship building at all housing association growth over
shape or size. relevant levels between the the past 40 years means that
parties. The better the data, stock rationalisation has a long
Stock rationalisation is not about information and trust on both way to go before the sector can
buying houses, it is about buying sides, the simpler the process. genuinely claim to be managing
businesses – homes, tenancies, asset portfolios as well as
• The benefits of a strong
customers, management possible. Getting the strategy,
financial evaluation of the
arrangements and all of the processes and risk management
likely value of the
ancillary supports that go right is essential to delivering
rationalisation project, linked
alongside them. Rationalisation successful projects.
to strategic considerations and
projects carry potentially
the possible alternative uses
significant financial, service
of the investment.
quality and reputational risks.
• The high value of good
Whatever the type of communications planning
rationalisation, the approach to and execution in maintaining
projects has to be right to achieve staff commitment, managing
beneficial results. There are uncertainty, and establishing
certain key things our experience positive early relationships with
has taught us: transferring residents and staff.
• The acute importance of a
With these basic principles
strategic approach to asset
applied, our experience is that
management and growth.
stock rationalisation can make
Rationalisations should
an important contribution
be strategy-led, not
to organisational strategic
opportunity-led.
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